In California, Directors and Controlling Shareholders Cannot Escape Liability for Breach of their Fiduciary Duties by Contractual Waiver

By Gerald P. (“Jerry”) Burleson, Member of the California Bar, and Robert Kaufman, Senior Law Student, University of San Diego School of Law

Officers, directors, and controlling shareholders have fiduciary duties to the corporation and its shareholders. In California, any attempt by an officer, director or controlling shareholder to waive these fiduciary duties is likely void, and minority shareholders can recover damages from officers or controlling shareholders for breach of their fiduciary duties, despite a purported contract waiving such rights.

The court in Neubauer v. Goldfarb (2003) announced this important rule that protects minority shareholders from abuse or unfairness by a fiduciary who seeks to contractually waive his or her fiduciary duties to the minority shareholders or to the corporation. Neubauer v. Goldfarb (2003) 108 Cal.App.4th 47. The court stated that “waiver of corporate directors’ and majority shareholders’ fiduciary duties to minority shareholders in private close corporations is against public policy” and any “contract provision in a buy-sell agreement purporting to effect such a waiver is void.” Id. at 57.

In this case, a minority shareholder sued the corporation, two controlling shareholders and the chief financial officer, contending they breached their fiduciary duties in connection with the corporation’s buy-back of the minority shareholder’s stock. The minority shareholder had sold his shares back to the corporation for $70 per share in reliance on valuations and supposed offers for the company that he had been informed of by the controlling shareholders. Less than 90 days later, the controlling shareholders sold their stock for $347 per share. Believing that he had been intentionally misled as to the value of his shares, the minority shareholder brought suit against the directors, the CFO and the controlling shareholders for breach of fiduciary duty and fraud.

The stock sale agreement between the minority shareholder and the corporation provided that the corporation, its officers, directors, and controlling shareholders were released from any fiduciary duty to the minority shareholder in connection with the sale of the stock. Despite that language in the agreement, the court concluded that the directors and controlling shareholders could not waive their fiduciary duties to the minority shareholder through such an agreement, and his suit against them could proceed.

There is often an imbalance of information between directors, officers and controlling shareholders on the one hand and minority shareholders on the other, which leaves minority shareholders dependent upon the directors, officers and controlling shareholders for information about the value and prospects of the company. Under the decision in Neubauer v. Goldfarb, any attempt by an officer, director, or controlling shareholder to waive their fiduciary duties to a minority shareholder when purchasing or selling shares is void as a matter of law.